3 Reasons to Use a Self-Directed Retirement Account to Build Wealth

by | BiggerPockets.com

I recently interviewed Edwin Kelley, the CEO of Specialized IRA Services. His company is one of a handful of custodians that specializes in self-directed retirement accounts. I don’t know an exact number, but I do know that this segment of the financial services industry is exploding right now. Why? Because the average investor wants more control over their long term investments.

For years, it has been accredited investors who were participating in and profiting from specialized investment projects, while the average investor had the majority of their wealth locked in a retirement account that was almost exclusively tied to the stock market. However, with the current opportunities available to the average investor through a self-directed retirement account, those days are gone. Even a modest retirement account that has been moved to a self-directed custodian can achieve incredible returns through new opportunities combined with creative strategies.

In my conversation with Edwin Kelly, he outlined 3 reasons to me why self-directed accounts make sense, especially for those interested in deploying funds into real estate:

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Security, Predictability and Consistency

Anyone with a retirement account can explore the possibility of moving that account to a custodian who specializes in self-directed accounts (here is a list of custodians you may want to look into). Whether it’s a Roth, an IRA, a 401K, etc., you have the ability to convert most of these to a self-directed account and start achieving a much higher level of control over your investments as well as your returns.

Related: What Does It REALLY Take to Build Wealth in Real Estate? The Answer May Surprise You…

For real estate investors, there are typically two strategies that are used to deploy self-directed funds into real estate. The first strategy is simply buying property through your self-directed account. This may simply mean buying a single family home, renting it and collecting the income and appreciation through the retirement account for years to come. However, it may also mean buying an apartment complex using non-recourse financing — the potential is limitless. Either way, this is a game changer for most retirement accounts that are limping along in a handful of conservative stocks, barely keeping up with inflation.

The second strategy that many real estate investors use through their self-directed accounts is private lending and note buying. Rather than owning the real estate, you own the mortgage associated with a piece of real estate. I actually love this strategy and lend to a number of different investors myself through my retirement accounts. However, in my business, I also borrow from a number of private lenders. We are always building relationships with new individuals who want to achieve high yields with the security of a first position lien on single family property.

When compared to a stock that can literally become worth nothing if that company files bankruptcy, when you lend money against a physical asset like a single family property, you have the security of knowing your investment has intrinsic value. In addition, when you work with a reputable provider, you have the consistency and predictability of knowing that your money will continually achieve the high yields that come from private lending.

Tax Benefits

I think most investors would argue that the main objective of investing through your retirement accounts is to accrue wealth in a tax free environment. Most people never truly appreciate how much taxes hinder your ability to accrue wealth. When you unlock the potential of a retirement account to generate income, the sky is truly the limit.

As a simple exercise, let’s look at what happens when you take $100,000 that earns 12%/year (which is fairly typical for a private lender) while earnings are taxed at 33% per year. If no money was added to this account over the next 20 years, but it continued to earn interest at 12% while earnings were reinvested, that account would be worth about $425,000 at the end of 20 years. However, if that same $100,000 had been invested through a self-directed IRA and had not been taxed every year, at year 20 the account would actually be worth $861,000 — over twice as much as when the funds were taxed!

I think it goes without saying that having the ability to earn money in a tax-free environment is critical to accelerating your wealth creation.

Asset Protection

Many people don’t consider this, but building your wealth through a retirement account is also a tremendous asset protection strategy. Without getting into too much detail for specific types of accounts, most accounts provide protection from creditors, bankruptcy and even personal injury lawsuits.

Related: The 5-Rung Wealth Ladder: How to Climb Your Way to Financial Independence

For real estate investors who may feel they have a higher exposure to lawsuits, using self-directed retirement accounts as an asset protection tool probably makes a lot of sense. That said, be sure to speak to your attorney and/or financial advisor to understand the protections afforded to you under your specific type of retirement plan.

As with anything, understanding how to use a self-directed vehicle is just the beginning. I am always learning creative strategies from other investors as to how to get the most out of my retirement account. In fact, in my recent interview with Edwin Kelly, he talks about one of his clients who took a Roth 401k with $100 dollars in it and invested in a property that earned him $40,000 in tax-free income! It’s amazing what you can do when you are armed with a good education and have the right people advising you in your business.

How about you? Have any of you employed creative strategies in your self-directed accounts to achieve significant tax-free returns?

Leave a comment and let me know!

About Author

Ken Corsini

Ken Corsini G+ is the host of the Deal Farm Podcast (on iTunes) and has 10 years of full-time real estate investing experience. His company, Georgia Residential Partners buys and sells an average of 100 deals per year and has helped hundreds of investors around the country make great investments in the Atlanta market. Ken has a business degree from the University of Georgia and a Master Degree in Building Construction from Georgia Tech. He currently resides in Woodstock, Georgia with his wife and 3 children.


  1. Avi M.

    Ken, great article! One thing you overlooked, though. That $861,000 will still get taxed eventually, even if at a lower rate. To compare apples to apples, this must be taken into account. I see this too many times where people gloss over this fact and make it seem like it’s a nominal amount — it’s not.

    Further question: let’s say in 20 years, you’ve accumulated multiple buy and hold properties outside of the self-directed IRA (because you wanted cash flow in your pockets now along side the properties you have in the IRA). Those outside properties will still be generating quite a bit in 20 years. Does this have bearing on your tax bracket? If so, I could see an even worse benefit of self-directed IRAs. At that point, you may not be in a lower tax bracket, so the main tax benefit would disappear. Curious if anyone can shed light on this.

    • Dmitriy Fomichenko

      In my opinion it is more advantageous to use self-directed IRA or 401k to invest in other alternative assets such as trust deeds and buy real estate personally. When you own trust deeds in your IRA all the income is sheltered, which is not the case if you owned them personally. And when you own real estate personally – you get the tax benefit of depreciation, which is not available with an IRA.

  2. William Morrison

    Did you happen to ask how the client with $100 account handled the setup fees, annual fees and if it was a Checkbook IRA the bank fees and IRA LLC fees?
    I looked at their fee schedule and not sure how that could happen.
    Even if a joint venture with others.

    I have a Solo 401k with rental property. I also have a small Roth IRA. Roth IRAs cannot be moved to 401ks. Traditional IRAs can. Go figure.
    The fee structure made it not worth while to setup. I was looking at a Checkbook IRA LLC.

    The 401k is better in my opinion if available to you. I’m the Trustee (no outside Custodian and endless fees) and leveraged real estate is not taxed the same as in an IRA.

    • Edward B.


      I am pretty sure that it is company specific and it depends on who manages your company’s 401k program. You will have to ask them. It is typically not in their best interest to allow you to roll your 401k assets out of their program on an annual or greater basis so I would be surprised if many of them, if any of them really, would allow you to.

    • Dmitriy Fomichenko

      Pablo, in order to self-direct your retirement account you would have to roll it over into a self-directed IRA. However, if your 401k is with the current employer you can rollover if one of the following occurs:
      1. You are no longer employed with this company.
      2. You reach retirement age.
      You should check with your plan administrator to confirm this but the chances are you can’t touch those funds.

  3. Edward B.

    In terms of asset protection, those laws are very state specific. As the author suggested, definitely consult an attorney or asset protection specialist if that is your goal. Many states to not protect non-ERISA retirement accounts, which I believe these are, to the same degree. Don’t assume you are good just because it is a retirement account. Especially since most company 401k programs are ERISA compliant and, therefore, offer better asset protection. You may be unwittingly exposing yourself.

  4. Your comments about how self-directed IRA has tax benefits, is interesting. I honestly didn’t know that. Retirement plans can be very costly and they have lots of variables involved with them. Thanks for sharing your comments. I will definitely consider them.

  5. Thanks for the advice. I\’m trying to start my retirement planning now (about 30 years in advance) so hopefully I\’ve got enough when the time comes. I like that a self-directed IRA is in a tax free environment. I lose enough money to taxes as it is; I\’d hate to have another chunk taken out later.

    • Dmitriy Fomichenko

      Nick, you are doing the right think – planning in advance. If you don’t do that – you would be destined to depend on government (which is not very reliable) or your relatives to support you during your retirement years. Or you will be forced to work till you die. None of those propositions are attractive to me therefore I always recommend starting to invest for retirement as soon as you possibly can.
      Self-directed IRA can grow in a tax-deferred (you pay taxes later at the time of distribution), not tax-free environment, unless you have a Roth IRA. With Roth IRA you pay taxes upfront on the contributions but you are able to grow your wealth tax-free and your distributions are tax-free as well. Also, since you already paid the taxes on your contributions – they could be pulled out tax-free and penalties-free before retirement.

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